7 Dividend Stocks You Can't Ignore Right Now

BALTIMORE ( Stockpickr) -- If you're looking for a clean corporate bill of health, dividend payouts might be the best clue you can find. According to research from Corporate Executive Board, dividend payers in the S&P 500 rallied an average of 8% higher last year than their nonpaying peers. That's some healthy outperformance.

Yes, I'm talking about 2011, a year when the broad market effectively closed flat on the year. That means that dividend companies could have meant the difference between making gains last year or ending things in the red.

That's a pretty strong reason not to ignore dividend payers right now.

While there's been talk of a " dividend bubble" in the last few months, there's little reason to believe that dividend stocks are getting overblown. After all, those dividends are being supported by record cash holdings and record profits, and the dividend yield for the S&P 500 still remains high by historic standards. Couple that with a payout ratio that's still low by historic standards, and it suddenly becomes pretty hard to make a case for a dividend bubble.

The study I mentioned isn't the first time we've seen evidence that dividends go hand in hand with higher capital gains. In fact, that's been the case historically:

Over the last 36 years, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while doling out cash to their shareholders, according to data compiled by Ned Davis Research. The numbers are even more compelling when looking at companies that consistently increase their payouts.

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First up is health care giant Johnson & Johnson ( JNJ). You can't find a stock that's more your prototypical blue-chip than Johnson & Johnson is. JNJ's business ranges from a pharmaceutical arm to medical devices to a massive consumer healthcare unit. Band-Aid, Neutrogena and Tylenol are just a few of the household names that fill Johnson & Johnson's product portfolio.

JNJ's health care exposure means that the company is less susceptible to economic headwinds than most stocks with massive consumer exposure; customers aren't going to stop buying Tylenol just because they're tightening their purse strings. While trading down to store brands has been a concern for JNJ, the company's brand is strong enough to keep its customers stickier than most. Medical devices and pharmaceuticals have even deeper moats because they generally don't face the same kind of competition that Johnson's consumer business does.

Johnson & Johnson has a very strong balance sheet with a deep net cash position (in other words, the company has more cash on hand than it has debt). That, and massive cash generation abilities, should keep the firm's dividends flowing in 2012. Recently, management announced a 7.02% dividend increase, bringing its quarterly payout to 61 cents per share -- a 3.73% yield at current price levels.

If you're an income investor, JNJ is an ideal core holding for your portfolio. Let me put it this way: If you're an income investor and you don't own shares of this $180 billion health care stock, you're doing it wrong.

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Another major firm that hiked its dividend payouts in the past week is snack and beverage giant PepsiCo ( PEP). Pepsi's management announced a 4.37% increase to its payout on Wednesday, ratcheting its quarterly payout to 54 cents per share. That's a 3.2% dividend yield at PEP's current price levels.

This isn't the first time I've written about Pepsi this week -- I highlighted the stock on Wednesday as one of five stocks hedge funds hate right now. There's no two ways about it: The hedgies are dead wrong about PepsiCo right now.

PepsiCo is the largest snack food company and the second-largest beverage company in the world, with brands ranging from namesake Pepsi to Lay's, Dorito's and Gatorade lining its product portfolio. That positioning makes Pepsi a critical part of consumers' grocery store shopping carts -- generating massive sales in the process.

While around half of sales currently come from the U.S. right now, Pepsi still has significant opportunities for growth in emerging market countries where burgeoning middle classes are ramping up demand for soda and snack foods. Coupled with new healthy offerings, Pepsi should be able to grow its top-line at a faster clip than most other blue chips can.

Simon Property Group

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Retail REIT Simon Property Group ( SPG) is having a stellar year in 2012 - shares of the $47 billion real estate investment trust have rallied more than 20% since the first trading day of January. SPG is the biggest retail landlord in the U.S., with a massive portfolio of malls, outlet centers, and other retail locations, 245 million square feet of leasable space in all.

While most people think of REITs as ways to invest in real estate, they're really not. Instead, these vehicles are almost purpose-built income generation tools. REITs like Simon use long-term triple-net leases when signing new tenants, a lease structure that effectively insulates them from the ebb and flow of the real estate market (as well as property taxes, insurance, and maintenance) while providing predictable income generation.

Because most of Simon's properties are malls, SPG also gets to take a cut of tenant sales. That gives this particular REIT more exposure to consumer spending than real estate swings.

Another factor in SPG's income-focus is the fact that REITs are required to pay out the vast majority of their incomes as dividends for shareholders. Last Friday, SPG announced a 5.26% increase in its payout, hiking it to $1 per share; that's a 2.57% yield at current levels.

While it's not hard to find REITs paying out higher yields right now, SPG's size and financial strength make it a good choice for a core holding nonetheless.

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Pharmaceutical and medical device distributor Cardinal Health ( CAH) essentially acts as a middleman between big pharma and the pharmacies and hospitals that provide drugs to patients. That's great business if you can get it -- but it also comes with little in the way of an economic moat. If either side of the deal (pharmaceuticals, medical supply makers, or major pharmacies) decide that profitability looks too attractive for firms like CAH, they can always opt to fulfill that role in-house. That's a risk investors should be aware of.

Cardinal's biggest advantage lies in its scale. Because Cardinal is combining the distribution efforts of some of the biggest players in the industry, the company can cut costs more than any single name could likely do on its own. That keeps CAH relevant, but it also keeps margins paper-thin.

Financially, Cardinal is in very good shape, with a small net-cash position and extremely consistent sales numbers. The firm's 10.5% dividend hike on Wednesday ratchets its quarterly payout to 24 cents per share, a 2.19% yield.

If you had to pick a single health care name to buy today, I'd recommend buying Johnson & Johnson over Cardinal Health.

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Humana ( HUM) is another health stock that hiked its dividend in the last week. Management announced a 4% increase in its quarterly check to shareholders, bringing its payout to 26 cents per share. At current levels, that means that Humana yields 1.28%.

Humana is a health insurer that covers approximately 11 million Americans. But this firm is unique in that Uncle Sam accounts for around 70% of its insurance customers. That's because the vast majority of those 11 million covered customers are on programs like Medicare Advantage, Medicaid and Tricare.

Hefty reliance on government programs is a double-edged sword for firms such as Humana. On the one hand, it provides extremely reliable revenues for the firm with large expected growth in users, but on the other hand, any changes from the government could slam HUM's business model.

And with Congress looking under every stone for ways to cut costs, a policy change that impacts private insurers like Humana isn't out of the question. Ideally, this firm would build its base of employer-sponsored plans to try to mitigate risks from government exposure.

While HUM's dividend hike is a positive for shareholders, this stock's small yield means that it's still far from core income territory.

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Utilities and dividends historically go hand in hand -- that's why the 16.8% dividend hike from Northeast Utilities System ( NU) on Wednesday was such a good sign for income investors. NU's subsidiaries provide regulated utility service for more than 2 million customers in Connecticut, Massachusetts and New Hampshire, a business that's not especially glamorous, but that provides hefty dividend payouts.

Following the hike, the firm's yield now sits at 3.8%.

Utilities are boring, and that's exactly why investors like them. Their rates are locked-in, demand for energy is fairly resilient and predictable, and interest costs are easy to get a handle on years in advance. Just as with REITs, utilities are tailor-made to pay out dividends.

To be fair, Northeast Utilities has been a bit more exciting than most peers lately, thanks to a $9.5 billion merger with NSTAR last month. The move widens NU's footprint and cuts operations costs, at the expense of some near-term rate concessions for consumers. Longer-term, investors should see the benefits of the merger.

While the utility business is capital-intense, NU has a reasonably strong balance sheet and significant cash generation abilities. Those factors should keep those dividends flowing (and growing) for the foreseeable future. NU makes a good core holding choice for income investors who are in search of utility exposure.

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Invesco ( IVZ) is another name that's had an impressive run in 2012. Already this year, shares of the investment manager have rallied more than 20%, largely on the heels of an equity rally that's sent assets flowing into Invesco's funds. Today, the firm boasts more than $673 billion in assets under management, spread across a number of brands.

Invesco's client base is skewed towards retail investors. While that means that its assets under management are more fickle than institutional money would be, it also means that the firm generates higher management fees than it would if it primarily managed other firms' cash. Fund performance has been steadily improving and outpacing benchmarks -- that factor should help IVZ attract more client money more quickly in the next bull market move.

Even though most of IVZ's AUM is in equities, the firm has a material fixed-income business; that expertise in both "conventional" asset classes should help avoid customer flight on the next downturn. Instead, the firm can move risk-averse clients to bond funds.

Invesco's successes are translating into dividends for shareholders. Recently, the firm announced a 40.8% dividend increase, making IVZ the biggest increaser on our list. The move hikes IVZ's yield to 2.83%.

Invesco is a nice core holding for income investors looking for low-risk financial sector exposure.

At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.